Stefan Karlsson's blog

Hard-Hitting Economics Commentary

Wednesday, November 28, 2012

Americans Not Adjusting Their Cash For Inflation

Here is an article noting that the U.S. Treasury would save $147 million by switching its $1 note with a $1 coin, but that proposal faces opposition not only from the supplier of paper, but also from a majority of Americans.

From a Swedish perspective, changing to a $1 coin would seem natural considering that here the highest valued coin, the 10 krona coin, is worth more, roughly $1.5, 6 times more that of the highest valued U.S. coin and 1.5 times more than a $1 coin would be worth

Still, even stranger from a Swedish perspective is however the coins that are still around, especially the penny. The lowest valued coin here is the 1 krona coin, whose value is about 15 cents, 1.5 times more than the value of the dime , 3 times more than the value of the nickel and 15 times higher the value of the penny.

Now, it is true that it was only as recent as in October 2010 that the previously lowest valued coin, the 50 öre coin was abolished, but even that would have been worth 1.5 times the dime and 7.5 times the penny.

Of course the fact that we have abolished the smallest coins and the smallest notes while the Americans haven't doesn't by itself mean that it is the Americans that have done it wrong, it could also be the Swedes who are mistaken. However, the fact that it now costs 2.4 cents to manufacture the one cent penny, means that keeping it around costs even more than keeping the 1 dollar bill. When making money costs more than the value of the money that is made, it seems strange not to adjust the denomination.

It seems to me that the desire to keep the smallest coins and notes reflects an unwillingness to acknowledge the effects of inflation. A nickel today is worth less than what a penny was worth as recently as 1973, and similarly a 5 dollar bill is worth less than what the 1 dollar bill was worth in 1973, so abolishing the penny and the 1 dollar bill would simply mean adjusting the denomination of coins and notes for inflation. But acknowledging that the dollar has been debased so much is perhaps something that many Americans don't want to do.

Wednesday, November 21, 2012

Still No Sign Of Those British Spending Cuts

We've all heard the fairy tale of the big spending cuts and "austerity" in Britain. Yet there is no trace of that in the British budget statistics. During October for example, spending excluding interest payments was £48.3 billion, up by 9% compared to Ovtober 2011. That reflected largely calendar effects, but if you look at the August-October period as a whole, the increase was 3.7%. And for the entire January-October 2012 period spending increased by 3.9% compared to January-October 2011. This is significantly above the rate of inflation (especially if you look at the GDP or domestic demand deflators) and also significantly above nominal GDP growth.

Because of that, and because of the fact that total tax revenue has been roughly unchanged in nominal termsm (which is to say they've fallen in real terms), the deficit has increased by about £10 billion. The increase would have been even larger if interest rates hadn't been so low due to Bank of England QE and because of the irrational investor belief in British bonds as "safe havens"., something that has caused interest payments to decline despite a rising debt level.

It could also be noted that because of a misleading accounting trick, formal net borrowing is down. What they did was to transfer the Royal Mail pension fund to a government institution, and then subtract the assets of that fund from net borrowing and net debt, while ignoring the liabilities that the fund has. This didn't really reduce the real burden of debt, but it reduced formal net debt, and for this year, formal net borrowing.

Thursday, November 15, 2012

Six Types Of European Economic Trends

Preliminary third quarter growth data for 20 out of 27 EU countries have now been released. The data shows great divergence in Europe between different countries in economic growth. A slight majority, 12* out of the 20, had smaller economies than a year earlier, with Greece again suffering the biggest slump, followed by the other Southern European countries as well as Czechia and Hungary. Latvia was the star performer, followed by Estonia, Lithuania and Slovakia. Note the big divergence in growth between the two countries that once formed Czechoslovakia.

Numbers for Ireland, Malta, Slovenia, Poland, Luxembourg, Denmark and Sweden aren't yet available, but for the other 20, one can divide them into the six categories you can see below:

*=some would perhaps object to my inclusion of Britain in the mild contraction category since they had zero annual growth. But considring that this first of all means that per capita growth is negative and secondly that the third quarter number was artificially and temporarily boosted by the Olympic Games (numbers for September that has been released indicates indeed that growth turned negative again once the Olympics ended)

South Korea's Extremely Low Unemployment For The Least Educated

One interesting detail is that in South Korea, a higher education level is actually associated with a higher unemployment rate, as the equivalent of high school drop outs had an unemployment rate of only 1.8%, those with the equivalent of only a high school diploma had an unemployment rate of 3% and those who had attended the equivalent of college or university had a 3.1% unemployment rate.

By contrast in the U.S. high school drop outs had a 12.3% unemployment rate, those with only high school diploma had an unemployment rate of 8.4%, those who attended college but didn't get a degree had an unemployment rate of 6.9% and those with college degrees an unemployment rate of 3.8%.

Exactly why the unemployment pattern differ so much between the U.S. and South Korea isn't entirely clear, but two possible explanations include that the much greater overall strength of the Korean labor market probably disproportionately benefits those with less education and that U.S. employers views formal education as a more important selection criteria when choosing whom to hire than Korean employers do.

Monday, November 12, 2012

Strong Estonian Recovery Also Continued

Estonia, like Latvia registered 1.7% (7% annualized) growth in the third quarter compared to the second, while growth compared to Q3 2011 was 3.4%.. Growth the latest year was lower than in Latvia, but as Estonia's growth was even higher than Latvia's in 2010 and 2011, cumulative growth since Q3 2009 was even higher at 18.9%. As in Latvia, Estonia has achieved this while shashing government spending and keeping a fixed exchange rate (since January 2011, Estonia is part of the euro area, and its previous currency kroons had a fixed exchange rate to the euro before that).

Sunday, November 11, 2012

California Now A Liberal Democratic One Party State

California, once the state of the anti-tax Proposition 13´in 1978 and both Richard Nixon and Ronald Reagan, has now become one of the most leftist states in America. This reflects mainly the large influx of immigrants from Latin America and Asia, who vote Democratic by over 70%, but to a lesser extent also the exodus of White conservatives to nearby states with lower taxes.

The latest election illustrated this shift even more than previous elections. Not only did Barack Obama in the Presidential election, and Diane Feinstein in the U.S. Senate election win landslide victories in California, but voters went for the liberal side in all three referendums, including the one approving a big increase in taxation on top earners. And as if that wasn't enough, Democrats now gained enough seats in both legislative chambers to get the two thirds majority to raise taxes. The check on taxation and government spending created by the two thirds requirement that was part of Proposition 13 has now been overcome by the Democratic tidal wave in California.

Meaning that taxes are likely to rise even beyond the increase approved in the aforementioned referendum.

The Petraeus Story Does Not Make Sense

There's several fishy parts about this story. First of all, I don't see why an affair should be grounds for being dismissed from his job. Who he has sex with may be relevant for his marriage, but not for his job. And it's not like it's standard procedure that high ranked people in the U.S. who knows classified information who engage in adultery are dismissed for it. After all, Bill Clinton kept his job as President despite his abundant knowledge of classified information and his indiscretions with Monica Lewinsky (Yes, I know he was impeached, but first of all that wasn't because of the adultery per se, but for having lied about it under oath in court, which is to say he was impeached for perjury and not adultery, and secondly, the impeachment was unsuccessful in bringing him down).

The official motive is that the affair created a security risk? How so? Because he told his mistress classified information? I don't know if he did, but the fact that he had sex with her doesn't necessarily imply that, anymore than the fact that Clinton had sex with Lewinsky implies that Lewinsky was told classified information.

And then there is the issue of the all too convenient timing. A popular military leader leaves his jobs, a few days after the Presidential election, but before sensitive Congressional hearings where Petraeus under oath probably would not have followed the official Obama administration cover up story line about its own incompetent actions related to the attack that killed 4 Americans, including the ambassador Chris Stevens , in Benghazi on September 11 thuis year by Libyan jihadists. Many sources indicate that CIA knew there was a security risk and wanted to beef up security, but that someone even higher ranked than Petreaus, meaning of course President Obama himself, intervened to stop it.

Unfortunately, Petraeus indiscretions seems to have provided Obama administration operatives with the perfectly timed and convenient pretext for hiding the truth about the Benghazi attack from the public.

Friday, November 09, 2012

Strong Latvian Recovery Continues

Despite the fact that most other European economies are contracting, Latvia continues its strong economic recovery, with GDP increasing during the third quarter this year by 1.7% compared to the second quarter and with 5.3% compared to Q3 2011. Compared to the cyclical low in Q3 2009, GDP is up by as much as 15.7%. If you consider the drop in its population, real GDP per capita is up as much as roughly 18% in three years.

This must clearly be due to the fiscal stimulus and devaluations that Keynesians in 2009 assured us was necessary for the Latvian economy to recover....oh wait, I forgot, they didn't do that and instead reduced government spending and maintained a fixed exchange rate.

Wednesday, November 07, 2012

A Democratic Victory Of The Non-Decisive Sort

As you all, Obama was re-elected despite his bad ideas and lousy track record. His victory margin was greatest in the District of Columbia (Washington) where he won by 91.4% to 7.1%. Among states he did best in his home state of Hawaii, with a victory margin of 70.6% to 27.8% and in Vermont where he won by 67.1% to 31.2%.. Romney won the most in the heavily Mormon state of Utah, by 72.7% to 24.9% and also won by large margins in Wyoming, by 69.5% to 28% and in Oklahoma, by 66.8% to 33.2%.

The elections to the Senate also constitute a victory for the Democrats, because not only will they keep their majority, they will likely expand it from the current level of 53-47. Including seats that didn't hold elections, they currently have 53 seats secured versus 45 for the Republicans. And in the two Senate races where no winner has been declared yet, the ones from North Dakota and Montana, they have a lead in both cases and will probably win one or both of them too.

The only consolation for the Republicans is that they'll keep a large majority in the House of Representatives. Currently, they have 233 seats secured versus 191 for the Democrats, with 11 seats being too close to call. While this means that Democrats are likely to gain a few seats from their current 193, it will be far short of what is needed to gain a majority.

With their President re-elected, and with a likely net gain in seats in both the House and the Senate, it's fair to say that this election was a victory for the Democrats. However, with the gains insufficient to gain majority in the House, or a filibuster-proof majority in the Senate, America will still basically have divided government.

Tuesday, November 06, 2012

The Economy Under Obama

Since everyone seems focused only on today's U.S. elections, it could perhaps be interesting to see a summary of how the economy has performed under Obama. Obama doesn't have sole responsibilty for it, in part because Congress and the Fed also influences policies, in part because previous policies by Bush and Greenspan also influences current outcome and in part because factors unrelated to policy affects the economy. Still, considering that his fellow Democrats controlled Congress for the first two years and considering that Obama agrees with some of Bush's policies (on spending and bailouts) and approves of the Greenspan/Bernanke monetary strategy (as evidenced by the fact that he re-appointed Bernanke) it isn't unfair to give him a high degree of responsibility.

So how has the economy performed under Obama? Well, let's look at three indicators: GDP-growth, employment and federal debt.

The GDP number is the one seemingly most favorable for Obama. Nominal GDP increased by 12% between Q4 2008 and Q3 2012, from $14,082 billion to $15,776 billion, which deflated with the 5.9% increase in the gross domestic purchases index implies a 5.75% gain in real GDP., which translates into an annualized gain of 1.5%. Yet while this represents growth, it is the lowest annualized gain of any President since Herbert Hoover,even weaker than the 1.6% annualized increase under Bush..It is however true that if you separates Bush's both terms, and compares his second term to Obama's first and perhaps only (we'll see about that soon), Obama's term was less weak than Bush's second

But considering that there was a slump at the end of Bush's second term might not be so favorable to Obama considering that deep slumps are typically followed by strong recoveries. For example, during the equivalent period under Ronald Reagan, between Q4 1980 and Q3 1984, average growth was more than twice as high at 3.2%, despite the fact that this period contains the entire deep 1981-82 slump, whereas most of the 2007-09 slump was already over when Obama became President. Obama's recovery has been far weaker than those that followed previous deep slumps.

The employment record is far worse. This chart pretty much says it all:

Compare this chart to the equivalent during Reagan:

Finally: then there's the issue of the federal debt. When he was inaugurated, federal debt was $10.6 trillion, . Now it is $16.2 trillion, a $5.6 trillion increase. The increase during less than four years is thus almost as large as the previous record increase of $5.9 trillion during Bush's eight year in office.

While one can argue over to what extent it is because of Obama, it is thus clearly an indisputable fact that the U.S. economy under Obama has been a failure.

Monday, November 05, 2012

Romney Would Be Less Bad-But Only Slightly So

Two days from now, there will be Presidential elections in the United States. The only two candidates with a chance of winning are of course incumbent President Barack Obama and Republican nominee Mitt Romney.

Which one of these should you root for, or perhaps even vote for if you're an American citizen (which I'm not)?

Personally, I root for Romney, because while he is unsatisfactory in many ways he is a somewhat lesser evil compared to Obama. He says he wants to reduce marginal tax rates and pay for those rate reductions by abolishing various deductions and loopholes, and wants to reduce non-military spending to close the deficit, while Obama is focused on tax increases. And in foreign policy he wants to end Obama's policy of apologizing and appeasing of the enemies of the West.

Still though, I wouldn't be too elated if Romney wins, or too sad if Obama wins. There are two reasons for this. First, when it comes too ending deductions and reducing spending, he has almost only talked about doing such things in generic terms, he hasn't provided any specifics when it comes to the deductions and only a few specifics when it comes to spending cuts (such as ending federal funding of PBS) and these specifics falls far short of what is necessary to close the deficit. And that leaves the suspicion that he doesn't know what to do. Maybe he has some ideas and will propose them after he is inaugurated, similar to how Obama went from opposing the individual mandate to purchase health insurance during the election only to advocate it after he became President, but we can't be sure. And if he doesn't the deficit problem won't be solved.

In all fairness, it should be pointed out that Obama's plan lacks specifics too apart from tax increases on the rich, which is similarly insufficient to close the deficit. But the point is that this means that Romney isn't much better than Obama.

The second reason not to get particularly worked up about the outcome, whatever it is, is that regardless who wins, he will trouble implementing his agenda. Remember that unlike for example Sweden, which have only one policy deciding institution, the one chamber parliament that in Sweden is called Riksdagen , America has three (or four if you count the Supreme Court, but it doesn't interfere with most political decisions): the President, the Senate and the House of Representatives. The upside of the American system compared to the Swedish is that it is more difficult to implement bad proposals, while the downside is that it is also more difficult to implement good proposals.

And since Republicans are likely to retain a majority (albeit probably a reduced one) in the House of Representatives, while Democrats are similarly likely to retain their majority in the Senate, this means that regardless if Obama or Romney wins, there will be won't be much of either bad or good changes implemented.

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